Care For The Poor In Nigeria: Fuel Subsidy Test

 By John Adeoti

Who really cares for the poor? Nigerians are among the best in the world in many professions and human endeavours. However, Nigeria continues to stink with endemic poverty, not because it cannot be tackled, but because we have remained unable to organise and deploy the necessary resources required to effectively confront it. Addressing the poverty challenge has been done at personal and family levels by many. Today, many affluent and accomplished persons have stories of stark and abject poverty behind them.

Likewise, many contemporary rich nations have history of being very poor in the past. Examples of rich nations with history of deep poverty in not too distant past include China, Singapore, South Korea, and Taiwan. One of the critical common factors to these countries is care for the poor by the civil and military leaders.

The case of China’s audacity in putting an end to endemic poverty is particularly instructive. From a positive viewpoint, China’s communist revolution is widely perceived as a movement that initiated a government that cared for its people. When the communist leaders discovered that the communist economic ideals were not yielding the expected result of care for the people, they made a bold and unusual strategic decision that was hitherto unimaginable. In 1978, the Chinese Leader Deng Xiaoping started the Chinese economic reform that opened the Chinese economy to capitalist ethos.

In demonstration of their care for the people, the communist party leadership committed itself firmly to poverty elimination; and Deng Xiaoping was reported to have declared, “poverty is not socialism; socialism means eliminating poverty”. By then, China was one of the poorest countries in the world with GDP of US$149.5 billion and a per capita income of US$156. In 1978, the per capita income of the world was estimated at US$2,026, making the world per capita income about thirteen fold that of China. 

In the same year, Nigeria was far better than China in living standards: though Nigeria had a GDP of only US$36.5 billion, her per capita income was US$527 (more than three times that of China). In 2022, China’s per capita income had risen to US$12,720 while Nigeria’s was only US$2,184. Moreover, China’s per capita income has caught up with world average per capita income which was US$12,648 in 2022; and President Xi Jinping of China gleefully declared in February 2021 that extreme poverty had been eradicated in China. It is also noteworthy that China had lifted 800 million persons out of extreme poverty between 1978 and 2021, the greatest poverty escape success in modern history. (All data cited are from the World Bank).

In Nigeria, who really cares for the poor? Nigeria’s somewhat consistent economic decline and descent into misery have been very embarrassing and worrisome in the past ten years. Most embarrassing is the reluctance to learn from successful exemplars and tardiness in reforming unhelpful policies, culture of decay and decadence almost in every sector of the economy. While Nigeria’s petroleum products subsidies started as veritable and perhaps justifiable means of cushioning the effects of rising international crude oil price instigated by the actions of Organization of the Petroleum Exporting Countries (OPEC) in the 1970s, the subsidies have been terribly mismanaged to become a dare-devil instrument of plundering Nigeria’s resources. The fuel subsidy scam and its apparent pervasive dislocation of allocation of scarce resources in Nigeria have taunted Nigeria’s policymakers for the past four decades.

Consequently, fuel subsidy in Nigeria, specifically subsidy on premium motor spirit (PMS) commonly called petrol, has generated diverse and unresolved controversies for many years. Every attempt to remove the subsidy has been sternly resisted by labour unions and civil society organisations with massive mobilization of the masses. The resistance to fuel subsidy removal easily receives mass support because it is perceived to be a fight in defence of the poor and vulnerable segments of our society. It is seen as a demonstration of our civility epitomised by our care for the poor. Care for the poor is core to every culture and civilization that have succeeded in banishing extreme poverty, hunger and lack. Government represents the people and has two main purposes: welfare and security of citizens. Though the two functions of government are interdependent, welfare directly connotes a good life for all. Care for the poor, as a welfare obligation, requires a thoughtful compensation mechanism for economic policies that may directly or indirectly hurt the poor.

While it is commendable that the new government of President Bola Ahmed Tinubu had been courageous in ensuring an end to petrol subsidy, the equally problematic and perhaps more needful concern and care for the poor stare us in the face. It is also impressive that the president is responding quickly and personally to agitations from labour unions and civil societies to ensure no one rocks the boat as we sail on with no petrol subsidy.

Fuel Subsidy Test
As an economist, I have written and advocated for the removal of petrol subsidy for so many reasons. The most profound of these reasons is the fact that subsidy on petrol is grossly inefficient because it is a subsidy on an imported consumption item with large domestic market. Worse still, petrol is a consumption item for which we have large comparative advantage to produce locally. Continuous subsidy accompanied by lack of credible efforts to revive local production is simply a transfer of local jobs to foreign lands and an avoidable stress on Nigeria’s foreign currency reserves. Besides, smuggling of Nigeria’s subsidized petrol into neigbouring countries became a big illicit business over which the security forces had lost control.

It has also been amply shown from economic statistics that petrol subsidy benefits the rich while hurting the poor. This is however valid only when public servants are prudent and disciplined in managing public resources. If our leaders continue with business as usual, fuelling fleets of vehicles with public funds, then the poor would still pay for the extravagance of the rich, and subsidy removal will profusely hurt the poor, at least in the short run.

Hence, to gain the support of the poor in the present circumstances, political leaders must show necessary decorum and fairness in allocating subsidy savings to address critical development challenges that directly alleviate the sufferings of the poor, particularly in the short term. In the medium to long term, the economy would have stabilised and the real gains from the termination of petrol subsidy will be made manifest as the government’s fiscal stance improves and subsidy savings are available for spending in education, health, infrastructure and other needful concerns that are required for genuine poverty reduction rather than mere palliatives.

Nigeria and its handlers are currently in a fuel subsidy test. We must pass this test and use the lessons thereof to address other menaces that are suffocating Nigeria. First, the contents of the new government’s antidote to the current sufferings instigated by end of petrol subsidy should be quickly unpacked so that the poor can directly experience compassion from the government. Secondly, our political leaders should demonstrate that they are not for business as usual in these unusual times.

Care for the poor suggests that our leaders everywhere (government, military, business, religious, communal, etc.) should be honestly committed to helping the poor and vulnerable to cushion the adverse effects of petrol subsidy removal. This should involve genuine sacrifices. These sacrifices are opportunities to win the hearts of the people and rebuild trust in our terribly polarised society. Politicians should jettison collection of obscene pecuniary allowances from government and the collection of ridiculously large sums of money as palliatives for the poor.

Palliatives for the poor can be directly served to the poor via appropriations to regular agencies and institutions that directly reach the poor. For example, the poor can be directly reached in public educational institutions, public health centres and hospitals, marketplaces, rural households, urban poor communities, micro and small enterprises of the informal economy sector, etc.

Low wage and middle income earners that are currently hyper-stressed due to petrol subsidy removal induced inflation can also be directly reached through immediate substantial wage increases, provision of transport allowances, increase in duty tour allowances, interest free vehicle maintenance loans, and provision of mass transit buses. It is impressive that some states (e.g., Lagos and Oyo) have temporarily reduced fares on mass transit buses. Other government-owned mass transit outfits should immediately follow this approach.

To consolidate the gains from petrol subsidy removal, locally assembled or manufactured vehicles should be purchased for mass transit programmes. This will help stimulate production and create jobs, thus making real contribution to poverty alleviation. More importantly, caring for the poor in these very difficult times should move us to curtail our exotic and inordinate taste for foreign goods and services. More than ever before, the current economic challenge demands that we use what we produce locally and limit import of consumer goods.

While working hard to reduce the dependence of Nigeria’s industry on imported capital goods and intermediate products, local production should be boosted by demand for locally produced goods. Our leaders should reorientate the populace by glaring examples of the choices they make: use locally-made or assembled cars, SUVs, wares, attires, etc.

In democracy, leaders should be happy to move and live freely among the people. It is strange that our politicians after winning election would ride in imported bullet-proof vehicles and harass fellow Nigerians with unreasonably long stream of vehicles when moving on highways to which we all have equal rights. I plead, even if unrepentant of such move, they should ensure those streams of vehicles are made or assembled in Nigeria.

Production and use of locally-made goods and services are sure paths to alleviating poverty and refurbishing the battered milieu that once inspired the Nigerian enterprise. Macroeconomic stability is good and needful for sustainable economic growth. However, Nigeria’s economic debacle is more of a production challenge than a macroeconomic challenge. Any opportunity to address the production challenge should be promptly utilised in every sector of the economy. Doing this in the context of petrol subsidy removal is needful to pass the fuel subsidy test.

In addition, passing the fuel subsidy test will necessitate a bold demand for the return to public treasury of all funds stolen by persons and companies indicted by audit reports and reports by special investigation panels into fuel subsidy management and related matters. For example, the 2012 report by Nuhu Ribadu-led Petroleum Revenue Special Task Force should be revisited and its recommendations implemented. The return of stolen funds to public treasury should be voluntary for a moratorium period to be determined by the president. Any individual or company that fails to return stolen fund within the moratorium period should thereafter face prosecution.
Exchange rate burden

I have always been sceptical of a liberalised foreign exchange rate for Nigeria, simply because of our very weak production base. A liberalised exchange rate favours only countries with vibrant production systems that have high-quality products and services. With a relatively weak currency, such a system makes production to boom because of export demand pull, creates jobs, and in the medium to long term, the currency adjusts according to the dictates of the currency market.

For Nigeria, the main exports are crude petroleum and a few agricultural commodities. It is yet to be seen how liberalization of the foreign exchange market (aka, unification of foreign exchange windows) with its attendant serial devaluation of the Naira can result in economic gains for Nigeria. Since the harmonization of exchange rate windows by the Central Bank of Nigeria on 14 June 2023, there has been spiral devaluation of the Naira, loss of value of Naira denominated assets, inflation hype, and avoidable pressure on price of petrol. The price of petrol had to be increased after the initial price deregulation largely due to the weakened value of the Naira. The outcome has been more pains, particularly for the poor.

As a measure to foster care for the poor, it is expedient to halt the current spiral devaluation of the Naira by returning to a dual exchange rate system: one for strategic economic transactions and one largely determined by market imperatives. The real problem in managing Nigeria’s foreign exchange is lack of discipline to prevent or punish bad behaviour, notably round-tripping. China has been branded as a currency manipulator, though other very competitive economies (e.g., France, Japan, Korea, Germany, Malaysia, Singapore, Switzerland, Taiwan, Thailand) also manipulate currency or even fix exchange rates for stipulated periods.

Of course, China refused to liberalize its currency because of the grave implications for exports. China has consequently enjoyed the enviable position of world’s largest exporter of manufactured goods since 2009 and will most probably remain so for a long time, taking the benefits of its profound experience in strategic management of exchange rate regime. Nigeria should learn from China’s example, by fixing the foreign exchange rate as a strategy to calm currency volatility and inflation.

This will help reassure the poor and vulnerable groups, whose purchasing power had been substantially weakened since the removal of petrol subsidy, that the current government cares for the poor. Moreover, it will also help big businesses already in panic mode to stabilise and recover from the current shock of sudden depreciation of Naira assets.
Compensating the poor

Appropriate compensation mechanism for the poor is key to successful end to fossil fuel subsidy. This is a major fuel subsidy test that must be passed. In 2015, I led a team of researchers from NISER and GSI-IISD (Global Subsidy Initiative – International Institute for Sustainable Development) in a study that investigated prospective compensation mechanisms for petrol subsidy removal in Nigeria. The findings of the study are relevant today as ever.

The study recommended that a portfolio approach to compensating the poor would be most beneficial for addressing the impact of petrol subsidy removal. A portfolio of compensation mechanisms identified include transport vouchers; mass transit schemes; e-wallet for smallholder farmers; free school meals for school children; free health care for the vulnerable; cash transfer scheme; and vocational skills development programmes. The portfolio could be combined as appropriate for the needs and capacity of each state and the Federal Capital Territory.

The compensation measures would have to be implemented without political interference or discrimination based on ethnicity, religion, gender or any other bias. The findings of the study also indicated that creating new institution(s) to manage the compensation schemes is unnecessary. Existing relevant ministries, departments and agencies (MDAs) with mandates relevant to these programmes should urgently be repositioned and strengthened to take on these responsibilities.

The study suggested the creation of a new Directorate for Subsidy Reinvestment Monitoring (DSRM) under the Office of the Vice President of Nigeria. The DSRM may not have access to the Subsidy Reinvestment Fund but should have the mandate and resources to monitor programmes financed by the subsidy savings fund. The subsidy savings fund should be domiciled in the Office of the Vice President to assure high-level oversight of fund allocation.

Since the Vice President is the Chairman of the National Economic Council, the reports of the DSRM can easily be shared with state governors and other stakeholders in the management of the economy. Based on the findings of the study, there should be a coordinating department and principal implementing agencies for the implementation of each of the fuel subsidy removal compensating programmes. Initial funding estimates suggest that the proposed eight programmes could be implemented with a budget not exceeding USD1.2 billion at the year of inception of the programmes, while the cost should reduce in subsequent years.

Finally, under a return to dual exchange rate regime, fuel imports should benefit from the fixed exchange rate as a strategic economic transaction pending when local production of petrol is revived. Petrol and other imports that fall under strategic economic transaction rate should be monitored by new petroleum industry players that exclude extant managers of the industry. Nigeria’s economy is in dire need of a reset that will make it yield benefits for the poor. The stoppage of petrol subsidy has made a remarkable contribution to this reset. All hands should be on deck to ensure no relapse under any guise or disguise to the old order.
Concluded

*Adeoti is a Professor of Development Economics, Nigerian Institute of Social and Economic Research (NISER), Ibadan, Nigeria.